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How Does Asymmetric Information Affect Catering Behavior?

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  • Szu-Hsien Lin
  • Huei-Hwa Lai
  • Ai-Chi Hsu

Abstract

This study examines the association between information asymmetry and payout policy, and how asymmetric information affects catering behavior. Using forecast error and forecast dispersion as information asymmetry variables, this study finds that the more information asymmetry the firms face, the less likely they will increase dividends. Meanwhile, the effects of information asymmetry dominate over those of catering incentives for managers to decide dividend policy. Finally, our empirical results demonstrate that the signaling theory holds when dividend yield is high or market underestimates the EPS of firms. In addition, companies use share repurchases as a substitute for dividend increases, and take retained earnings into account when making dividend policies.

Suggested Citation

  • Szu-Hsien Lin & Huei-Hwa Lai & Ai-Chi Hsu, 2018. "How Does Asymmetric Information Affect Catering Behavior?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(11), pages 2433-2454, September.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:11:p:2433-2454
    DOI: 10.1080/1540496X.2018.1458611
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    Cited by:

    1. Mehmet Levent Erdaş & Emel Bachá Sımoes, 2020. "The Relationship between Audit Mechanisms and Dividend Payout Policy within the Framework of Corporate Governance: The Case of Turkey," Journal of Economy Culture and Society, Istanbul University, Faculty of Economics, vol. 62(0), pages 255-284, December.
    2. Aleksandra Pieloch-Babiarz, 2022. "Catering to investor sentiment for dividends: contestability or collusion of the largest shareholders?," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 17(2), pages 435-457, June.
    3. Mehmet Levent Erdaş & Emel Bachá Sımoes, 2020. "The Relationship between Audit Mechanisms and Dividend Payout Policy within the Framework of Corporate Governance: The Case of Turkey," Journal of Economy Culture and Society, Istanbul University, Faculty of Economics, vol. 62(62), pages 255-284, December.

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